 |
|
What is an LLC?When discussing the various business entity options, some times it makes sense to start at the very beginning. In this article, we cover the question of what is an LLC? What is an LLC? In any discussion about business entities, the LLC choice is thrown around with corporations, partnerships and so on as though it has been around forever. Most people are surprised and even shocked to learn the LLC is a very recent phenomenon as far as business entities go. The first LLC came into existence in Wyoming in the late 1970s. The purported reason was the state was trying to create a business entity that was friendly to use by small businesses. The real reason, of course, was the state was trying to generate extra revenue sources. After a favorable tax ruling by the IRS in the late 1980s, every other state in the nation jumped on the bandwagon and the LLC became the popular entity it is today. So, what is an LLC? It is a hybrid of other business entities. It provides the asset protection shield of a corporation, but without the harsh formalities required to keep it running. Instead, it combines the informalities found in a partnership as far as both administration and taxes. The LLC also comes with its own language. The owners are not known as shareholders. Instead, they are called “members”. One or more members can manage the company. There is a document similar to bylaws that sketch out how the entity will be run, but it is called an “operating agreement.” The entity also does not have shares as would be found in a corporation. Instead, members own a percentage of the LLC. There are a couple of downsides to the LLC, mostly financial. The first problem is states have overtaxed the entities to the point where you can expect to pay more fees regarding a California LLC than any other business entity. Another problem arises with an LLC owned by one person. Specifically, the IRS reclassifies such an entity as a sole proprietorship, which means you must pay self-employment taxes on your profit at a rate of 15.3 percent. What is an LLC? It is relatively new business entity with the best features of a corporation and partnership. That being said, the fees and tax situations surrounding it can often make it a poor choice for many small businesses. |
